The SBA 504 program provides small business owners with loans to expand or buy their own commercial real estate. The loan terms typically include: 90 percent financing, 25-year amortizations, fixed interest rates, and no balloon payments.

These loans are provided through partnerships with community-based nonprofit lenders which are referred to as certified development companies (CDC) and regulated by the SBA. Currently, there are at least 260 CDCs across the country. Borrowers can work with these CDCs through the SBA or through a Preferred Lender.

The property that is financed by the loan serves as collateral and the typical 504 loan breakdown of funding guarantees looks like this:

• 40% of project costs, SBA
• 50% of project costs, CDC
• 10% of project costs, Borrower

The program also requires personal financial statements, or guarantees, from anyone who owns at least 20 percent of the borrower’s company.

The 504 loan program has very strict guidelines for financing purposes. That list includes:

• Purchasing existing facilities.
• Purchasing real estate, either undeveloped or improved.
• Constructing new buildings.
• Reconditioning, overhauling, updating or otherwise making over existing buildings.
• Buying long-term machinery.

Borrowers should note that since the loan refinance provision has expired, 504 loans can no longer be used to consolidate, repay or refinance existing debt unless it is related to expansion of facilities or equipment.

In order to qualify for the 504 program, borrowers must be requesting financing for a for-profit company with a net worth of no more than $15 million and an average net income of no more than $5 million. The SBA cap on their contributions is set at $5 million. The final condition is that the small business must create or retain at least one job for every $65,000 that the SBA guarantees. If the small business is a small manufacturer, then the ratio is increased to one job for every $100,000 guaranteed. Businesses can also increase their funding by showing that they meet public policy goals of reducing energy use or promoting alternative fuel consumption.

This program benefits small businesses by enabling them to finance real estate purchases and expansions with only 10 percent equity instead of the 20 to 30 percent which is required for the majority of conventional loans. Borrowers can also use hard money loans or bridge financing to help them qualify for a 504 loan. To learn more, check out our previous blog on SBA 504 loans.

For more information about the SBA’s loan programs, check out their website.